ReSolve Riffs on the Global Landscape with The Macro Tourist (Kevin Muir)

This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day.

In an upside-down market it’s hard to know which way is up. Many investors rely on Kevin Muir, otherwise known as the Macro Tourist, to help them navigate these uncharted waters.

Kevin is a pragmatic macro analyst and trader who is focused on trading markets as they are, rather than how you might wish they were. This means being conscious of your own ideologies and biases and actively setting them aside so you can see with clear eyes, and adapt your thinking in response to shifting data and insights.

Modern Monetary Theory (MMT) was the center of gravity for the conversation. Kevin describes his journey of discovery and how the underlying mechanics reflect the actual plumbing of the global economy. He explains that Sovereigns that borrow in their own currency and are able to print money are not constrained by deficits. Rather, Sovereign borrowing acts as a direct credit to the private sector. As such, governments are constrained by whether the aggregate productive capacity of the economy can absorb the demand from the private sector that results from their borrowing. Inflation arises when demand exceeds this productive capacity. As a result, long-term prosperity depends on how quickly a country can increase its productive capacity, since this rate will dictate how quickly the government can create wealth for the private sector without creating inflation.

MMT is often embraced by those on the left, who believe it provides an imperative for spending on government programs. Kevin explains that deficits can also arise from cutting taxes, so it is a bipartisan theory.

We address several concepts including:

  • How does MMT impact the role of confidence in a currency?
  • What would happen if Japan canceled the debt held by the Bank of Japan?
  • What was the impact of fiscal cuts during the Obama administration?
  • How do we direct spending to areas of the economy that are more likely to achieve capital formation?
  • How do we implement MMT without exacerbating the already large wealth gap?
  • If MMT is coming, what is the highest convexity trade?

Mike, Rodrigo, Richard and Adam stick around after Kevin leaves to discuss MMT in a broader context and raise even more questions.

Thank you for watching and listening. See you next week.

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Long passionate about markets, Kevin grew up in a household where his father was an equity research director. Being exposed to market talk as long as he can remember, Kevin’s true love was always macro. In fact, his first trade was in the US dollar index which promptly went limit-locked against him.

Not deterred, Kevin persevered and got a job on institutional equity desk for a big Canadian bank in the 1990s. Kevin moved into a proprietary group where he was in a charge of the equity derivatives book. Kevin had a ringside seat for the madness of the DotCom bubble, but in 2000, with a new young family, and the desire to no longer work for a bank, Kevin set off on his own. For the next 17 years, Kevin would solely trade his own account with another former co-worker from the bank and a full-time computer programmer student they hired. Since then, Kevin has joined a well-establish prop group.

TRANSCRIPT

 Richard00:00All right, we’re live.

Mike00:03Yes, we are. Another –

Richard00:04Mike.

Mike00:06– Another happy hour. Another week down. I don’t know about you guys, but are Friday’s coming more rapidly than ever before. Is it just me?

Richard00:13No, I can say that.

Rodrigo00:15I thought it was Tuesday.

Mike00:16Yeah.

Rodrigo00:17

Mike00:18Honestly. I know, I’m having a tough week when I’m having a Chardonnay.

Rodrigo00:23I’m drinking coffee today because I had my happy hour last night.

Mike00:28It sounds like it.

Rodrigo00:29Just so you guys know. Kevin, what are you drinking?

Kevin00:30So I’m having a beer. Just true Canadian boy. Actually it’s from Nova Scotia, I believe.

Richard00:38Mike, you want to hit us with a disclaimer before?

Mike00:41Yeah, you’re having a Stella down there in Brazil. So we got a Brazilian with us. We’ve got a Peruvian. And we got a couple of Canadians. This is going to be fun.

Richard00:49That’s right.

Mike00:50It’s going to be fun.

Rodrigo00:50Global Macro. For sure.

Mike00:51And as always, and by the way, our Newfy partner might join us, Adam Butler. Not, he’s a commentator at large, at the moment. So if he pops onto the screen, nobody get scared or anything, he’ll just fit right in. And, as always, we’re going to have a wide ranging free conversation about all kinds of neat global macro, odd topics and items and investment stuff. Please don’t take any of this as advice. Go get advice from real professionals who know what they’re doing. Not a group of guys having a happy hour at three o’clock on a Friday. And with that said, I will turn it over, Richard, did you want to introduce Kevin a bit, yeah?

Richard01:31Yeah, I actually want to give him the opportunity to introduce himself for anyone who might not know him. I think there will be few out there. But Kevin, if you want to do the honors. This is the Macro Tourist.

Backgrounder

Kevin01:43Yes. So my name is Kevin Muir. I’ve been in the industry for a long time. I started off at RBC Dominion Securities, I got a job on the institutional equity desk. When I was a young kid, I actually hadn’t even finished university. And I got a job on the institutional desk, my boss used to joke, he said, “There was guys that were better at computers. And there was guys that were better at trading. But you were the right mix of both.” So I was lucky enough to get on to a big bank dealer in the early 90s. And when computerized trading was taking off, and very quickly, I kind of became the derivatives specialist and eventually was the prop trader and did that for most of the, all the way through the 90s, until 2000 came along. In 2000 I saw the writing on the wall in terms of the market was about to, like rollover, and we’d actually had our first child, she was born with a heart defect that was luckily corrected at birth, but was one of those kind of moments when you decide what’s important in life. And I decided that the bank was slowly eating into the fun that I used to have, at the old dealer. And so I quit. And I like to joke and say, “That it was like Michael Jordan, when he scored the basket. And won it for the Bulls. I left on our best kind of quarter ever.” And I went off and I decided to, I wasn’t sure what I was going to do. So I kind of went home and thought about it. And I decided that I was about to go get a job at a hedge fund and I thought, well, you know, if I go work for a hedge fund, and then a year later I get bored and quit, or want to do something different. Everyone’s going to remember me as the schmo that left after a year. But if I go trade for myself, a year later I go work for someone, you know, a hedge fund, nobody will remember the year I traded for my own. So I started trading on my own and with another guy that actually quit DS, RBC Dominion Securities. And so we started trading our own account. And I kind of said, “I’ll keep going until this, you know, until it doesn’t work.” And one year turned into two, which turned into five, which turned into 20. And my daughter went off to university and then I finally decided I better get a real job and do something else. So for the past couple of decades, I’ve been trading my own account along the way I got, you know, it was, it’s kind of isolating trading for yourself, we had an office and you know, we did have computer programmers. So there’s three and then we had a clerical staff. So there’s four of us, but it was still wasn’t the same as the old days that had, on the desk and all the camaraderie and I missed it. So I started writing, and it started originally as a journal. Because everyone says traders should write the journal and you know, get their thoughts out on paper. And so I started writing this journal, and people would ask me, well, you know, my buddies would say, “What do you think about the market?” And I would say, “Well, you know, here’s what I wrote”. And so I’d send it to them. And then I decided, it actually was easier to put it on the net, and I put a password on it and just gave it to my friends. And eventually just took the password off because I got fed up with it, you know, giving it to them. And, lo and behold, actually, people started reading. It was the biggest shock to me as well. And so I started, you know, going downtown Toronto and people say, “Oh, well, I love your stuff. It’s fun, and it’s good.” And so that was where the Macro Tourist was born. I came to the conclusion that this was actually a very, kind of, great marketing tool. Because in the past, you know, it’s just some guy sitting in a room trading. Now all of a sudden when I’m out there putting things out, I could go and call up a strategist or call up somebody and the recognition really helped. And then people would be giving me ideas and going back and forth. It’s been a great experience. I’ve really enjoyed it.

Mike05:22So that is really interesting, because it’s, it’s something that happened to our CIO, Adam Butler, because he was in the same thing, sort of 2000.  Pardon me.

Rodrigo05:34You’re a little hot, sir.

Mike05:35I’m a little hot, from here? Okay. I’ll go into sultry mode. So he was, he found it quite cathartic as well, to sort of get your thoughts down, start to share it. And that was the launch of the Gestalt U blog back, you know, I guess, going 12 years ago now. Yeah.

Richard05:55Yeah.

Rodrigo05:56And that’s really, again, the launch of the business. I’m curious, though. Kevin, I’ve heard other global macro managers talk about how there’s more pressure when you’re trading in the eyes of the world than when you were trading your own account. Have you felt, once you started publishing and putting your ideas out there? Was it harder for you to change your mind? Because of what you put on paper.

Changing Your Mind

Kevin06:04Yeah. So there is that tendency to get onto a position and then you don’t feel like you can go the other way. And there’s some very famous guys out there that become known as the Dollar Bear, or the whatever it is, and then they can’t go back and forth. I actually don’t seem to suffer from that. I would say the only thing that I’m really bearish on that I might be overstayed my welcome is bonds. But otherwise, I’ve been pretty willingness to jump back and forth. And in fact, I kind of found that writing slowed down my trading. And I, it’s one of those things where you shouldn’t like, “Do as I say, not as I do.” Because, you know, my partner used to laugh. And he said, if we just put it all in your ideas and took our time, and were patient about it, we do much better with the Macro Tourist portfolio than this hyperactive, going back and forth. So I didn’t find that, that wasn’t something that really bothered me.

Richard07:18So Kevin, if you were to sort of describe, in broad strokes, your framework, you started off as a derivatives guy, and then you went into product trading. How would you maybe specify the way you think about the world and sort of your global macro views.

Kevin07:35So one of the things that I like to say is, “Do as what will be done, and don’t worry about what should be done.” And this is what I find so many people in trading, they sit around, and they argue about, you know, what is the right course of action, not, I say, that’s great, but that’s not going to make us any money, let’s think about what’s actually going to be done. And I think MMT is a perfect example, Modern Monetary Theory. A lot of people, when they first heard about it, they got their backs up, they thought that was terrible. And they thought it was a bad policy. So they therefore dismissed it. I went and learned, you know, everything I could about it. And then I realized that even if you don’t like this policy, that this is the way the world is headed. So one of the things that I like to do is to make sure I’m causing it, where the world is headed. And I don’t try to let my own personal beliefs affect my trading. And that is one of the things that, you know, I really, truly believe. Like, if all of a sudden tomorrow, like I am a huge bond bear for the long run. But if tomorrow, the deficit hawks took over Congress, and we got a situation where they were trying to balance budgets, I’d get bullish bonds, even though I think it’s dumb, you know, if I saw the policies that were being put in place that were going to cause bonds to rally, I’d go with it. The other thing is that I’m probably more willing to fade stuff than most other people. I found that over the years of watching like, the Twitter, you know, all these finance guys, all these hedge fund guys, they get on to a story, they all sound, they think they sound so smart. And it’s intoxicating. You hear them, you go, “Oh, that’s great.” You know, this XYZ manager thinks that the, the Chinese renminbi peg’s going to be broke, or the Hong Kong peg is going to be broken, or something like that. And there’s all these like just super sexy sounding trades. And I’ve just found that over the years, these guys have just cost you money, over and over and over again. So one of the things that I am willing to do is say, the hedge funds are the new dentists of the world. Like everyone, when I was growing up on the desk, we always used to say, “You sell when the dentists are buying.” Meaning that that was the late, you know, the late last bought person buying. The hedge funds are the ones that are pushing it around and when all the hedge funds are in a trade, you know, that’s when you should be taking the other side. So ironically, the more it’s out in the media and the more that, you know, story gets passed around Zero Hedge, the more I want to fade it.

Mike10:12I think Hugh Henry said something very similar in that, in his hedge fund days before he retired, he had, you know, he’d found himself being the, you know, the Sentinel guarding a narrative that had passed him by. And, you know, it felt like, you know, it’s wrong, it can’t happen. This isn’t the way it should go. It’s not fair.

Kevin10:35Right.

Mike10:35And you think that the market doesn’t care about fairness, it doesn’t care about anything, it just care, does what it does. And one has to adapt to that. And is that, are those some things that like, those are the key, are there any other key traits of successful trading that, you know, you’ve got that flexibility of mind, not getting stuck on a narrative, being malleable? Are there any other points that are just absolutely critical to success?

Kevin10:59Well, I you have to learn how to take your losses. So many guys just get crushed by hanging on and just it, kind of the same, you know, the other side of the same coin. Like that, if you end up being one of those things, where you’re just fighting the market over and over again, that can just crush you. So it’s kind of almost like, you have to be able to forget, when you have a bad day. Like, when something goes wrong, and you just almost have to have, it’s not really a thick skin, it’s like you, it’s like, you have to have a memory of a goldfish. You just don’t, you don’t let it bother you. You know, you have a bad trade, you mess up, you go off. If you think about it, like, think about the other professions in our world, like engineers, and doctors, they have to be right, like, always. Like, they go through lives, like engineers, like they build bridges, you know, like his success rate, his or her success rate has to be 100%. And that’s what they strive for. But if, when we think about trading, someone has a success rate of 60%. I think one of the best traders in the world is Stanley Drukenmiller, he’s got a success rate of 60%. That means –

Rodrigo12:07That’s wildly good.

Kevin12:09– Drunken Miller is wrong 40% of the time.

Richard12:12And sizing, right? So, Soros used to say that he was one third of the time accurate, but he would really size him appropriately, so that when he had a lot of small losses, but then he had a couple of really, really gargantuan wins, so …

Kevin12:28Right. And well, I think that was Soros’ real strength was for himself, was the willingness to just, when the opportunity presented to just go for the jugular.

Rodrigo12:37Impressive.

Mike12:38Yeah.

Kevin12:39But –

Richard12:39]Call that bet?

Kevin12:40What I really liked about Soros, there’s a famous story about in the 80s, when he was running his hedge fund. And when he was having a bad run, he would go and fax over his portfolio to Goldman Sachs, on Friday afternoon. And fax over the entire portfolio and say, “I want to put a bid on it.” And they would bid him on the whole portfolio. And he would go to 100% cash, and then start over on Monday morning. And I thought like, that’s really important, because he was, you know, sometimes you get a position on and you’re just keeping it because you’ve had it on. And you know, it’s the wrong thing. And it’s not until you get the position off, that you actually start to think clearly. And yours, your mind starts to do –

Rodrigo13:27It’s the sunk cost fallacy, right?

Kevin13:28Yeah.

Rodrigo13:29You think you owe it to your previous stance or position. That’s why I asked you, when you write and you put your position in there, you know, how difficult it is to move away from that? Because there is a there is a feeling of a sunk cost that you’re letting somebody down or letting your previous self down. But if the idea is to have a clean slate every morning. And the, a lot of prop traders, they trade and they go cash overnight, and then come back and start over the next day. And that’s the way they run their business.

Kevin13:53Yeah.

Rodrigo13:54There is something to be said about that.

Kevin13:55One of my big problems, is that I try to mix a lot of timeframes. And that’s where I get, I run into trouble. So, you know, what’s the old joke? It’s like, what’s the definition of an investment? It’s a trade gone awry or whatever. Like, so I have to be cognizant of that fact that I can’t go and turn what was supposed to be a trade into an investment. Right?

Rodrigo14:19Let’s talk about that. You have a thesis, right? You’ve been talking about a lot of MMT stuff? You have a position on the inflation trade, you know, classic, you know, well thought out global macro thesis. Where the rubber meets the road is the tough part, right? How do you position, once you have this macro thesis? How do you go about putting your positions? And you said something about your macro prop trading but with quant, how does that come into play for you?

Positioning Portfolios for MMT

Kevin14:50So I also use sentiment a lot. So, and I will go and I like to be on the other side of sentiment. And my big problem is that I actually, once people start agreeing with me, I feel uncomfortable. And it’s something that I’m working on is actually as a trade works for me, I stay in it. Recognizing that the herd isn’t always wrong. Which is unfortunately, what I kind of feel like. If I go, and I always used to laugh about my Macro Tourist pieces, I would write one and there was a while I was just, I was giving them away for free. So I had a wide, wide, broad kind of group that would read it, you know, it would be 10s of thousands of people would get this. And I would come up with something controversial, like, you know, I want to be, everyone’s selling the dollar, US dollar, and I would be bullish the dollar. And if I got emails back, telling me, you know, most people were nice, not all them but most. If I got emails back telling me that, “No, you’re wrong, this dollar is headed lower.” Inevitably, I found that those, the more emails I got, the better the trade was, for me. Meaning that people were so tied to it, they were so you know, driven to the, you know, to this trade being correct. So I used it as actually a sentiment indicator. And I would actually find that they, when I got the most amount of hate mail, the trades would often work better than any other trades. And when they agreed with me, when I did a trade, and then everyone agreed with me, I got nervous. I’d be like, “Oh, God.” And inevitably, those are the ones that I would be in trouble, a lot. So I use sentiment to a large degree in my trading. But I also kind of tied into a whole global macro view. And what I, you know, we talked briefly about MMT. And that was recently one of the big changes that I went through in terms of understanding the plumbing of how the actual economy works. And I’m an economics major, and if you told me five years ago that I would be actually interested in what an economics professor told me, I would have told you, “You’re insane.” Because over the years, I’ve watched them just cost me money, time and time again. They don’t seem to understand anything about the real world. They’re all, their theories are crap. It just, it was terrible. But what happened was with MMT, I actually didn’t understand it. And I reached out to a fellow at Bespoke Investment of, you know, a fellow Canadian by the name of George Perks. And I said, “George, I see you’re talking about this MMT, can you put me on the right path.” And so he gave me a few things to write, or to read, sorry. And I, you know, I thanked him, and I went home, and I learned about it. And the more I learned about it, the more I realized that this was explaining how actual markets work. And to me this was what, it was almost revolutionary in terms of my thinking. Because they knew things like QE wouldn’t cause inflation, they knew things like EU was doomed to have troubles because of the way it was structured. There’s a whole bunch of things that they just, were completely on the ball on. And it was difficult to kind of understand it. Because when you went and heard it, like when they talked about, they spend money first, and they don’t borrow. And you’re like, “Well, no, that can’t be.” and you kind of you learn these things. And you’re you hear them, and you’re like, “No, that can’t make sense.” But if you keep an open mind, and you really go and delve into them, you start to understand that the actual plumbing of the economy, how the economy works, these MMT folks actually explained it better than anyone else. And so I used the MMT framework in a large degree to understand how the actual economy works. And that was kind of recently one of my clicking. And I, you know, to be fair, I was already sympathetic to many of the ideas. Like, I always thought during the great financial crisis, it made no sense to me that we were doing quantitative easing, and the government was buying bonds, when everyone else was buying bonds. I was like, “No, the government should be actually issuing bonds, and spending, like going out and putting fiberoptics in everyone’s home or, or doing in fixing the bridges and stuff.” It made no sense. So there’s already, I was already, I kind of my thinking was already that way. And it was just MMT made it so I could express it in a much more clean way. Anyway, so going back to like how you go and trade all these things, I develop kind of a framework for how I think the economy and how the markets are going to work. And the perfect example is that when we have the COVID crisis, I at the bottom, you know, I may have been a little too early. But I think I got on to Macro Voices, which is this big podcast, and I got there. And I was really bullish. And I said, the government is going to spend, and the government is going to spend, we’re going to be shocked at that demand kind of, replacement. We’re going to be shocked at what that’s going to mean to the market and we’re going to higher, go higher. And you should have seen the hate mail I got. It was just unbelievable. And I think I missed the low bar like, three days. And the hate mail, it takes everything in my body to not tweet them back to them because they were so mean. But –

Rodrigo20:11Really like when you say hate mail you’re not exaggerating? Like people –

Kevin20:14No. Yeah, I actually one time had an MMT podcast. I had a guy phone me, leave a voicemail telling me that I should go to hell and all sorts of terrible expletives. It was, it shocking. And I’d be like, you know, like, I’m like, and so one of the things I always laugh about these people that take all this stuff too seriously, is that we were on a trading desk, and we saw the people we traded against all the time. And if we have nobody to trade with, we like there’s no one willing to take the other side, we have no trade. So I’m always like, I’m happy when people disagree with me, because we can go and trade. And so I have like, I don’t have a desire to prove to you that I’m correct. I have my theory, this is what I’m doing. And I’m going to sell it or I’m going to buy it. And the fact that you disagree and you want to do the other side of my trade is great, because that means it’s mispriced. So I –

Richard21:09For what it’s worth.

Kevin21:10Yeah.

Richard21:11Kevin, you should know and be as wary as you think that warrants. But you have three guys here that actually think that MMT is well within the Overtone window. And whether we like it or not, it’s bound to become policy, at least in the US. And I don’t know about other countries. And so I think there’s definitely an avenue for us to kind of dig a little deeper into your thoughts on that. But yeah, I think it’s pretty clear. We, I listened to Stephanie Kelton in, on the Macro Voice, and talk about a siren song man, like, she says exactly what you want to hear in terms of, in this day and age with all the inequality and then governments with all this firepower that’s been proven not to generate inflation. Why not? So there’s a deficit myth? I mean –

Kevin21:55Yeah.

Richard21:56I would be interested …

Rodrigo21:57Can we cover that for the audience, for those who don’t understand just the basics of MMT?

MMT 101

Kevin22:01Sure. So MMT is the idea that governments are never financially constrained. Or, certain Sovereigns. Sovereigns, that borrow in their own currency and they’re able to print are never financially constrained, they are constrained by real resources. And the way to think about that, is that if you go and they create debts, they can always pay them back. And you might say, “Well, no, no. But that’s going to cause inflation.” And yes, that is correct. That is your constraint. The government can spend until it starts competing with the private sector and causes inflation. And so the MMTers believe that there’s no reason to have underutilized resources sitting, you know, docile, in the economy. So if there’s someone that doesn’t have a job, you should give them a job. And one of the interesting parts about MMT is that it’s been kind of, taken over by the left, meaning that a lot of these people that want to spend big and do a lot of government programs have taken it over. But if you go look at the father of MMT, is a fellow by the name of Warren Mosler, and Warren Mosler is a very famous hedge fund manager, and he’s super entrepreneurial guy. And he’s actually fairly right leaning. And he will be the first to tell you that MMT you know, the decision to spend is a political decision. But you can just as easily cut taxes, and that provides fiscal stimulus. And so one of my, you know, tenets that I’ve been talking to people for a long time, is that Trump has actually been the most MMT president we’ve ever had. And you’ll say, “Why?” And I go, “Well, he was six years, eight, six or eight years into an economic cycle. And what did he do? He didn’t go and pay down the deficit, the debt, like he didn’t go and try to cut the deficit, he actually did a tax cut.” And so if you think about what a Keynesian would be telling you, a Keynesian would be telling you at that point that you should be paying down the debt. If you go talk to an Austrian, they would have been telling you that they should be raising rates because it’s way too low. Well, what does the MMTer believe? MMTer believes that you should keep you know, running fiscal loose until you get inflation. And so when they ask Trump, they go, “Well.” You know, “Why do you want lower rates? Why are you spending all this?” He goes, “Because there is no inflation.” Now, you know, I’m the furthest thing from a Trump supporter like, so don’t mistake that. I’m just saying that this policy is, has been in place. And is actually coming to all sorts of economies throughout the world. And I argue that the COVID crisis was the tipping point –

Mike24:44Accelerant.

Kevin24:44– For us understanding this.

Mike24:46Yeah. Can you –

Kevin24:47And I really do think that there was a dramatic shift, we were going to get there anyways. But the COVID will, we will look back, and COVID crisis will be just as monumental, as when Volcker went and raised rates and cut the, you know, stopped inflation, we will look back at 2020 being our 1981 moment when inflation was created.

Mike25:14Right. So can you help me understand the part of MMT that I’m, there’s a few parts that I’m learning and foggy on a little bit. But the idea of this, the intersection, so monetary confidence. Like, there’s money is just about confidence –

Kevin25:33Right.

Mike25:33– I think. And so at some point, where does the this idea that a country with a sovereign currency get a loss of confidence in that currency because they’ve done too much? Is that a function of inflation? Is that a function of deflation? Like, where do we get, because I mean, okay, that’s fine. Put all the zeros and ones in the computer, pay off all the debt way we go, start again, we can start with a clean balance sheet, why bother having any debt?

Kevin26:03Yeah.

Mike26:03At that moment in time, though, if you do that, it creates a lack of confidence, because you’ve done too much at once. Is it? Do you have to sort of ease in and watch these levers as you go? Like, how does that play into –

Kevin26:17Well.

Mike26:17-The MMT framework?

Kevin26:19So MMTers will tell you that they will only do as much as, until inflation shows up? And I think that therein lies the problem.

Mike26:29Right. Me too.

Kevin26:30Yeah. Like, and I, you know, you look at monetarism, which is what we’ve had for the past four decades. And has it been abused? I would argue it’s been tremendously abused. We have negative rates in Europe. Everyone keeps trying to do more and more. You know, we’re human beings, we’re going to mess it up, we’re going to do this. And so I look at MMT and say, we’re going to make a mess of this, we’re going to do too much of it. Like, and there’s no doubt in my mind. And I, although I’m sympathetic to the MMT ideas. And I think that if you gave me a choice between MMT and more of the status quo of trying to do QE and all this stuff, I choose MMT. I still think it’s going to end like, not badly, but it’s going to change and chances are we are going to have inflation. So when you talk about what are the worries in terms of losing confidence? And will this happen? The answer is we don’t know. We just don’t know. Like, eventually you’re right. If we do too much of it, we will lose confidence. But here’s a little kind of mind, kind of, experiment that I like to tell people. So we have the Bank of Japan has 250% of its GDP outstanding as debt. Okay. So it’s got this 250% of GDP outstanding as debt and who owns half of it? The Bank of Japan.

Mike27:55Yeah.

Kevin27:55The government’s short, and the Bank of Japan is long. Okay. What do you think would happen overnight, if they just took the long and short and flattened it?

Mike28:06Flattened it out.

Kevin28:07Yeah. Like, would anything change in the real economy?

Richard28:12No –

Mike28:13I don’t know. Tell me.

Kevin28:18Just ignore markets. Like forget about markets.

Rodrigo28:20Like, it’s the idea is like one man’s debt is another man’s profit or asset. The moment you try to get rid of debt, when it’s real people that you’re taking that asset away from.

Kevin28:31Yeah.

Rodrigo28:31You are ruining families, you are ruining businesses, you’re ruining the economy, right?

Kevin28:36Right.

Rodrigo28:36When you take that side off the table, and you’re dealing with the same government just like, shifting chairs around and nobody is really getting hurt by it. It’s theoretically, I haven’t thought this through much. But theoretically, if that’s the person getting hurt, and they’re the same person really, like once you get to the MMT, you’re no longer an independent Fed. Right? Like, now you’re working together.

Richard28:58That’s why it’s so easy for countries like Argentina to default on their debt over and over, because it’s overseas holders. Once it’s the population of the country that holds most of the debt, it becomes socially –

Rodrigo29:07Yeah, but –

Richard29:07– Socially unpalatable for –

Rodrigo29:08– In this case, it’s not foreigners that own the debt. It’s the same country that owns –

Kevin29:14It’s the same thing.

Rodrigo29:14Right?

 Richard29:15Right. So the default is never going to happen.

Kevin29:16So but let’s just imagine they planned it overnight, I think nothing would happen. And now all sudden, the Bank of the Government of Japan instead of being 250%, outstanding, as in terms of amount of debt, is only 125%. So then you think yourself, wait, wasn’t that inflationary? Because that means they can go spend another 125%. And which is back to the whole idea that there was never financial constraint in the first place. And that the real constraint was always inflation, not this, like this whole Carmen Rogoff thing about you know, this time is different. That’s, that book. There is nothing worse than that book. And it’s not just for these … And I’ll tell you, this is another example that I’d love to tell people. So let’s go through the great financial crisis. And understanding what happened there. And how this worked is important to understanding how we’re going to evolve from here. So up until, you know, in the past four decades, going into the great financial crisis, everything in terms of economic slowdowns was met with lower and lower interest rates. And if I have a push back to MMT, it’s that they focus too much on the government side while ignoring the private side. Because I will acknowledge that the private side can create money, there’s two ways you can create money. One is the government can spend it into existence. The other one is banks can go create money by lending, by, you know, you go buy a house government –

Rodrigo30:46Fractional system, banking system. Yeah.

Kevin30:48So what happened was, for the past four decades, going into the great financial crisis, every time we had a situation where the economy got into trouble, they lowered interest rates and encouraged the private sector to take more and more debt. And so we had a situation where every like, we encourage more private debt, and it took lower and lower interest rates to encourage more debt because it had all been building up, right? Like, if you already have a lot, you know, the next time rates go to 2%, you need them to go to 1%, for you to take up another loan. So we continually tried to create it through the private money system, like through the banking system. But then the great financial crisis hits. The great financial crisis hits, we go to zero, and lo and behold, they put rates to zero and nobody wants to borrow. Nobody. It’s just is a disaster. The private sector says “Nope. We got too much of this stuff, we have to stop borrowing”. So at this point, credit is being contracted. Okay, we have contraction of credit. And yet, what does the government do? You know, we forget, but there was, Obama was faced with this whole Tea Party revolution. And if you go look at the discretionary spending of the federal government over the past four decades, there were only three years when it fell before the great financial crisis. It was 1964, 1968. So it was Lyndon, was JFK and Lyndon, I think it had to do with the war, and they were worried about the war. And then it was 96 with Clinton. Every other year, the federal government spent more on a year over year basis, you know, in real dollars. So they just kept growing and spending more and more doing bigger and bigger deficits. And then all sudden, we get into the great financial crisis, we say to ourselves, “Oh, look, this debt is the problem. We have to stop spending.” We went through five years when the discretionary budget of the federal government fell. So at that exact time when the government should be spending, we were actually cutting or the Americans were cutting, you know, Canadians were I don’t know, I haven’t looked at it in terms of what we were doing. But in general, the world was doing the same thing. Governments were issuing, doing pro-cyclical fiscal cuts when they should be doing the exact opposite. And so that’s why we had QE 1, 2, 3, operation Twist, because the reality was that fiscal was not only not helping was actually making the situation worse. And so this is when I go back and talk about how COVID has changed. I think in the past, you know, decade, we’ve had the opportunity to understand this problem. And now, when we hit the zero bound, even Powell is sitting there begging them to spend and which they did. And that is really what is so dramatically different.

Mike33:50So how do we, balance? So that the spend is one thing and then there’s the productivity of the spend.

The Productivity of the Spend

Kevin33:58Yeah, so I hundred percent agree with you there. And I think that is one of the things when you’re thinking about where to invest in the coming years, you should ask yourself, “Is the government just handing out money so people can sit at home and watch Netflix?” Which listen, they might have to do in the terms of this. But eventually, you know, where they invest is going to matter. And I like, take your company, if you guys went out and took a loan. And you know, let’s say you got The Killers to come play. And you had a great party. And you know, it was like a great evening out. You took that million bucks and you blew it all in a night. Okay? That would be simulative over the short run. But over the long run, you wouldn’t have made your company any better. Now, have you taken that million dollars out bought computers, hired people, stuff. It would be dramatically different. So I agree that one of the problems with MMT and this is my big kind of, pushback to Mike, to Paul Krugman is that he argues, you know, if you dug a ditch and then got someone to fill it in that that would be good. And I would argue that ultimately what that does. If it’s not spent correctly, it means that you’re going to hit your limit on the inflation all the more quickly. And that’s kind of my push back –

Rodrigo35:09Yeah. Its productive without productive resources.

Mike35:12Without the commensurate growth –

Kevin35:13 Right.

Mike35:13– To cover the level of inflation that’s occurring.

Kevin35:17Yeah.

Mike35:17Right. That’s where I get nervous.

Rodrigo35:20You’re going to get from I think, Ray Dalio said this and it’s all of a sudden, you’re going to get, allocate resources to fiscal policy, right? You’re out, you’re allocating global resources through fiscal policy, it is a government controlled spend.

Mike35:32 Centrally planned economy all of a sudden.

Rodrigo35:34Centrally, kind of, centrally planned economy, and you’re now competing against the private sector for that, right? Depending on what you’re going to do, like –

Kevin35:41Yeah, so you’re going to get different inflation on how like, depending on how you spend it, right? Well you can go out and you spend it on, I don’t know, the green, like, if you go spend it on green, then all of a sudden, you’re going to find that whatever it takes to build all that green energy, you’re going to be competing against them. So you will get different inflation depending on what you do. Listen, the other thing is, you know, like, I always joke and say, if I was a benevolent dictator of Europe, and I would immediately raise rates from negative 100 basis points to positive 100 basis points. And I would cut taxes and spend until the economy balanced. But I would also cut taxes, like I wouldn’t just think that all the solution is government spending. Because I think that a lot of, you know, extent, cutting taxes is going to be more beneficial, and let the private sector decide where to spend it.

Rodrigo36:28So as a whole, let me put my, my liberal hat on, as a whole that does make sense. It’ll likely grow the pie, right? You cut taxes, you get more capital markets, the capital markets work to grow the pie. Socialism works to shrink the pie. The question really is, when you do that, when you cut taxes, then it’s up to that centrally planned government’s spend in order to minimize that wealth gap. Because if you’re just growing the pie, where only the capitalists and people with resources and money and capital, and the education are the ones benefiting from that you are going to create a wealth gap that’s going to create some sort of social unrest, right? So this is really where you need to, the spend needs to be done in such a way where you’re minimizing that.

Kevin37:13What if, what about instead of cutting taxes at the upper end? What if you cut taxes at the lower end?

Mike37:19Right.

Kevin37:19When you did payroll –

Richard37:22Make it progressive, right? Because the propensity to spend happens much lower in the, in the social strata, if you will. And that kind of plays into what I was going to ask you. Because you mentioned Europe, and you mentioned Japan earlier on. And the two striking features there, I would say, for this inflation function is demographics, right? So how do you factor that aspect of it, aging populations, people that have stepped outside of the workforce, and inflation at the end of the day is a monetary phenomenon? It’s a behavioral phenomenon, in a sense, because if you don’t have people spending into the, into the future, how are you going to create that inflation?

Kevin38:07So I think the demographics, all it does is end up being a headwind or a tailwind for you. But I think it is never the driving factor that you should use as your kind of, investment mantra. So I know there’s very famous people out there like Lacey Hunt, and other deflationists who have argued for a long time that demographics and all the debt outstanding, will cause inflation. I think that we listen to them, and we continue to try to balance budgets, and we do all these things that are actually procyclical cuts, we will get the deflation they’re worried about. But I think that all that’s missing in terms of creating inflation as the political will. And we go back to the example with Japan, Japan, you know, we could you could argue they have 250% of debt GDP. But do they really? Because, you know, the Bank of Japan owns half of it. So the reality is, it’s maybe it’s 125. So I think that people that base their investment decisions based upon demographics, run the risk of getting run over when the political landscape changes in terms of this way that we operate our economy. So, but don’t mistake what I’m saying. I definitely think that demographics make it easier or harder to create that inflation. But at the end of the day, if we want to make inflation, we can make it at any time. And I think it’s hilarious that people tell me that this economy that we’re going to have deflation, and we’re going to implode. I always ask them to give me an economy that has ever collapsed because of deflation. Like I can’t think of one. Like, there’s none. And yet, I can name a lot that have collapsed because of inflation. So I think these bond bulls that are sitting around arguing that we’re, you know, 50 basis points or 65 basis points on the 10 year, and we’re about to go to -4, you know, 400 basis points, which I’ve heard, are just absolutely insane. And they’re playing the worst version of musical chairs that one day when this shift occurs, which I think I’ve argued, we have shifted, and as long as we continue down this road that we entered into, meaning that we continue to spend as needed, that we are going to enter into a period of inflation. And there’s nothing worse that, you know, in a period of inflation than owning bonds.

Rodrigo:00:40:45Kevin, can I just, I want to understand that part. That last part there, this idea that you have, let’s say we have inflation, right? But we know that the Fed, the governments of the world can’t service the amount of interest that they need to pay back, right? So there’s been talk about the governments of the planet being able to artificially keep that rate low, how do they, how do we keep that rate low while also benefiting from inflation, you know, reducing your real debt on the balance sheet?

Kevin:00:41:21So my best guess is that the governments are going to leave the front end pinned at extremely low rates as they go out and they do fiscal spend, and then they’ll have it pinned, the front end and pinned, there is the risk to that we are going to get yield curve control, the YCC. And if that happens, you know, I think, it’ll be the death of the bond market. The reality is, think about like all the people on Wall Street, Bay Street, you know, in London, that trade bonds, that it’s going to be like the JGB market. Like if you’ve ever, I think there’s days that there’s no JGBs that trade. And so that’s what we risk. And to me, when I think about the signal that the bond market sends, I think it’s an important signal. So if I was advising people, I would say, make sure you let the front long end trade, because it’ll give you the inflation signal that we’re so worried about. So, but in terms of I’m thinking about investors, when they’re when they’re thinking about it, you know, best case scenario happens, is that we get yield curve control and you make your nominal amount on your bond, and you don’t get hurt. Worst case scenario occurs, we get a decade of 5%, inflation, and you get destroyed on a real basis. And that’s really what, I think is going to happen. Because figure out what a decade of 5% does to the debts outstanding. It really picks away at it and makes a big difference, right? Like –

Rodrigo:00:42:56I think that’s the only way out for them.

Kevin:00:42:58Yeah. So, you know, I don’t know exactly how it’s going to look. And it’s going to depend, and it’s going to be a dance back and forth. But I really do think that when I when I sit around and think about the risks to this, to investors today, I think that the risk that everyone owns bonds with the idea that they’ve been a great diversifier against their risk assets. They’ve been negatively correlated for the past 40 years. They’ve gone from, you know, 18%, in the long end down to whatever stupid number we’re at now, it’s been a great asset. But I really worry that that that ballast to your portfolio will become an anchor. And in times of periods of inflation, if you go back and you look, stocks and bonds aren’t actually negatively correlated in like in the 60s and the 50s. I think they were actually, you know, positively correlated. And that’s what I’m concerned about the most.

Mike:00:43:59There is a function of the discount rate, right?

Kevin:00:44:01Yeah.

The Hazards of MMT

Mike:00:44:02You have cash flows, there’s a discount rate, the real rate is negative. And so, I also want your, I would love your thoughts on the, a couple of hazards that occur in all of this, right? You have the moral hazard of irresponsible risk taking, if you will, which can lead to less productive investments of assets. But I also think there’s a regulatory hazard. So you have now officials who are not elected, who have an awful lot of control in the economy to some extent. Do you have any thoughts on the regulatory hazards that the banks face sort of akin to what happened in Japan to some sense, any kind of thoughts on that? On the powers being put into a place, you have less and less banks, as an example. So you’ve got a central bank and then you’re having this contraction of banks, larger and larger banks rather than smaller, more diversified banks being controlled by a fewer and fewer group of people, does MMT alleviate that regulatory hazard? Does it accentuate that? Have you, have any thoughts on that?

Kevin:00:45:11So I, so again, remember that MMT is, is a description of how the economy works –

Mike:00:45:18Right.

Kevin:00:45:18And the decisions based upon that understanding of how the economy works, are political decisions. And this is one of the things that I’d just like to stress, is that everyone likes to think that MMT is like this AOC spend, you know, green, you know, all these things, it could just as easily be tax cuts. It doesn’t have to be –

Mike:00:45:38Right.

Kevin:00:45:39So I just, I’m wary of just kind of saying that’s MMT, because that’s not MMT.

Mike:00:45:46Right.

Kevin:00:45:46MMT is the broad framework in terms of understanding how the economy works.

Mike:00:45:50It’s how it will be manifest.

Kevin:00:45:51Yeah.

Richard:00:45:52It’s more like outside of the ivory tower, if you will, it’s outside of economic orthodoxy. And it’s just a different way to make sense of how the economy works.

Kevin:00:46:01Right. And it’s taking in reality, the fact is that, we were on a gold standard and, you know, until Nixon took us off. And we, the books, the economics books that we were using, we’re all based upon us being on that gold standard. And then we went to a fiat, you know, system, and we didn’t change any of our economics books. We didn’t change any of our thinking. And, you know, again, do I think that MMT will be abused? Well, do I think the politicians will take this, spend too much? Yeah, for sure. Do I think that they’ll start like making irresponsible investments? Do I think that it’ll cause all the things that you’re worried about? 100%. It’s coming. So get yourself ready for it and just kind of the, you know, that’s the reality of it. And I think that the perfect example is just understanding, think about how bearish everyone was at the COVID crisis low, they were convinced we were going to implode. And yet the government goes, and like we take it for granted now, because it seems so long ago. But very few people thought the government could stand in here and create the, both the bounce in the economy and bounce in the market like it has. And I think everyone’s been shocked at that, right? Like there was a lot of people thought that this thing was going to implode, this is going to be a great depression, and yet the economy bounced. And the reality is, yeah, you could say that at what cost, they’ve gone and they created this debt. But again, we went through the example with Japan, is it really the debt and like, maybe we’re thinking about things wrong. You know, that’s, and that’s what I’d like to put out there, and that’s, in terms of like, when you’re thinking about your trading, you have to think about when you’re going through one of these tidal shifts. And like in when you’re thinking about how the world has changed. If COVID really is this change in the way we’ve thought about deficits and the way we thought about economics, then there could be some huge kind of ramifications to your portfolios. Like I go back to 81, back then there was Henry Kaufman, was a huge inflation bull for Salomon Brothers. And he was doctor, the original Dr. Doom. And he thought that inflation, there was no way you’re going to stop it, not a chance. And he went on and on. He was so bearish on bonds and he rode that thing all the way, like yields went down, down, down, down and he stayed bearish bonds the whole way, meaning like he was, he thought yields were going to go back up and that inflation was going to be there. And I think there’s going to be the Henry Kaufmanns of this generation as when we look back at this.

Richard:00:48:41Kevin –

Rodrigo:00:48:41So, I think, as a matter of fact, you are talking a lot about inflation, and we haven’t seen it in such a long time that people almost have given up on it.

Richard:00:48:47They’ve written it off. Yeah, for sure. But Kevin, it sounds like you find this current equity bull run sustainable to some degree, given that you weren’t as surprised as I guess most people were, as stocks bottomed around March. But if you think about how thin the breadth of this equity bull run is, it’s on the back of FANGs plus a handful of other sort of technology adjacent industries that have benefited from the lockdown or the walking forward of how people imagine the economy in the coming years. Do, is this something that you would imagine will continue going forward? There’s a lot of lagging stocks and –

Kevin:00:49:32So first of all, you can tell me if, are we going to go and left some deficit hawks, are we going to go put a, you know, the Congress in terms of the US, is it going to go to Republican and we’re going to get a situation like we had in with Obama, where you have a Democratic President and Republican, you know, Senate that was stopping spending. And if that’s the case, then I’m not bullish equities, because one of the things that’s all important is that we continue to spend as needed, as we get through this crisis. And I think I can’t remember which one of you mentioned the fact that it’s an accounting kind of reality is that one person’s credit is another person’s debit. And one person’s debit is another’s credit. The deficit of the government is the private sector’s credit. And I know that that’s a crazy thought to think about. And it’s very difficult for people to wrap their heads around. But if we get into a situation where we try to get the deficit down, and we actually try to balance the books, I wouldn’t be as bullish as I am on equities currently. So that that’s the truth of the matter there in terms of its, it’s predicated upon this wave of spending and new kind of thinking, continuing. In the moment, I see that changes all change with it. But for now, I look at, you know, we’ve talked about Stephanie Kelton and how she’s gaining prominence and people are listening to her. I think that more and more, we’re getting people that realize that what we thought was true, wasn’t the case. And there’s no need for us to sit around and try to balance this budget and sit around talking about what we’re going to leave to our kids and stuff. Like one of the things that I always laugh at, and I think that MMP people do a good job of that, they always say, why is there always money for war, and yet there’s no money for welfare, or you know, feeding kids at lunch, or whatever it is, right? Like, think about things like World War II when the Japanese bombed Pearl Harbor, do you think the Americans went and said, “We better check with the market to see what we can borrow.” No, they just went and spent, like, and, yeah, eventually it’s going to create inflation. And one of the things that I like to talk about as well on that is that people say, “no, they didn’t go spend, they actually borrowed it in war bonds.” And one of the things about the war bonds is they actually did that after the fact, they first spent. And the reason that they did the war bonds is because they wanted to change the people’s behavior. If you’re thinking about yourself as a government, and you’re trying to build as many ships as you can, and as many guns and you know, everything you need to, you know, facilitate a war, the last thing you need is some guy going out and buying a new Buick. So what you do is you go and you actually encourage him to give you, instead of spending that money on a new Buick, to buying a war bond. And this is one of the –

Rodrigo:00:52:37To make weapons, right?

Kevin:00:52:38Yeah.

Rodrigo:00:52:40You have big limited resources.

Kevin:00:52:41Yeah.

Rodrigo:00:52:42You have limited resources and the last thing you want to do is compete against the resources you need to build those.

Kevin:00:52:45Exactly.

Richard:00:52:46And the economy was still at gold standard, so we have to factor that in as well. We weren’t in the fiat system where you could just print it away. So there was some reckoning there towards the ballasts to which the economy was beholden to. So –

Kevin:00:52:58That’s correct. You’re absolutely, you’re absolutely right. You know, I don’t disagree at all. But –

Rodrigo:00:53:02But it’s interesting if there is no impact to spending, then it is, it does beg the question, you know, why don’t you spend enough so you can get the lowest, most poor individuals in the United States to a higher level by just printing some money.

Richard:00:53:17Hence the name of the book –

Rodrigo:00:53:19Or borrowing.

Richard:00:53:19The Deficit Myth, right?

Kevin:00:53:21Yeah.

Richard:00:53:22That’s actually what it’s called.

Mike:00:53:23So then it’s been, it really is a matter of maximizing the productivity of the spend. So why can we spend on war but not an education?

Kevin:00:53:33Right.

Mike:00:53:33As an example, like if I was going to prioritize things –

Adam:00:53:55Because war actually facilitates capital formation.

Mike:00:53:38Yeah, it’s a good point. And to the winner of the war go, the spoils, right? So there is a function of war that should create more spoils for the winner. And the loser of the war is wiped out for, you know.

Adam:00:53:53Well, yeah, essentially, it’s kept, its assets are seized, for the –

Mike:00:53:57Correct.

Adam:00:53:57For the productive purposes –

Kevin:00:53:57Yeah, but I don’t think though that if you go look at the Iraq war, that you could argue that that was money well spent, and then there was assets seized.

Mike:00:54:06Alright. Alright, fine.

Adam:00:54:07I don’t know. Do we lower the cost of oil? Do we lower the cost of oil?

Rodrigo:00:54:10Yeah, yeah, oil did a, so –

Mike:00:54:13Not, not all wars are like that. I will grant you that.

Adam:00:54:16For sure, for sure. If I may, I’m wondering, in the event that and I think we all are in agreement, perhaps finally, that MMT is coming, what is the highest convexity trade in that direction?

MMT and Convexity

Kevin:00:54:29That’s a great question. I think one of the things that the, that, I don’t know if it’s the highest convexity, but I think it’s the one trade that people, that need to be aware of is that they need to think about owning inflation break-evens. For me, that’s like, I kind of have two trades that I really believe in. One is the Steepener. I think that the curve eventually goes steeper. The trouble about the Steepener is the fact that we have a situation where the government might do yield curve control. So I worry about that. But fundamentally, I feel like you should just always be long the Steepener. But –

Adam:00:55:02So banks, right? The banks are levered to the Steepener too.

Kevin:00:55:05Right. Okay. So you’re on the banks then, and they’re cheap right now as well, like so the reality is, it’s a great trade. But in terms of longer term, I think the thing you want to own is inflation break-evens. And I think it’s going to be the home run trade in terms of , you think about you’re a pension fund, and you have that, you know, you have liabilities, what, you know, yes you can buy gold, and gold will hopefully track inflation. But the reality is that people, a lot of people don’t realize gold actually tracks real rates more than it tracks inflation. And –

Rodrigo:00:55:39You get to keep what you have, yeah.

Kevin:00:55:40Yeah. And the real thing that, you know, the breakeven trade, meaning that you’re long TIPS and you short the equivalent nominal bonds so that you extract only the inflation, I think will be right now very few people can imagine inflation ever coming. Even though we’re talking about it a little bit now, most people are not designed for this, like most portfolios are hugely exposed to this. And so I –

Richard:00:56:08 … prevails, right? For 99% + for the –

Adam:00:56:11Well, the greatest indicator of whether or not the public, or certainly the investment public, perceives risk of inflation is if we see an increase in the issuance of inflation protected bonds, right? I mean, the outstanding nominal of inflation protected bonds is a vanishingly small fraction of the size of the nominal bond market that will change fundamentally over the course of any sort of inflationary episodes.

Kevin:00:56:37Unless the government’s scared to say issue them. And then they’re going to go to even more big premium, like so –

Adam:00:56:43They’ll issue whichever debt is cheaper, right? So –

Kevin:00:56:45But how will you know the –

Adam:00:56:47The government is always overly optimistic.

Kevin:00:56:49Yeah, you’re right. So, but I suspect that what you’re going to see is, right now if you go look at the inflation break-evens, they have a lot of, the curve is below 2%, meaning they don’t think the government can even achieve or the central bank can even achieve their target. And so I argue that I think you could see those things going from under 2% to five, because people realize it’s the only thing to protect them, right? In terms of actual inflation protection. If you go look at one of our big Canadian pension plans, Ontario Teachers, you’ll see that they actually divide up their portfolio in terms of stocks, bonds, real assets, and they have a fourth one, and that’s actually called inflation, right? And so the, it’s not like, it’s not, you know, when they own some, you know, infrastructure product that goes into the real bucket. But then they have an inflation bucket. And the inflation bucket is long break-evens, long inflation swaps, just pure inflation. And, I think, they’re one of the few pension plans that have actually done this. But I suspect that before this is all through, that there’ll be many more that do this.

Adam:00:57:56The gravy about the Ontario Teachers is that they modelled themselves after All Weather. So –

Kevin:00:57:59Oh, did they?

Adam:00:58:00Yeah.

Kevin:00:58:01I didn’t know that.

Adam:00:58:01And they’re a risk parity shop, which is kind of neat.

Mike:00:58:06So what are the implications then on this, on the inflation trade for equities?

Kevin:00:58:14So that’s going to be really hard to tell because you, do you price equities, like let’s say the curve got really steep, do you price them based upon, like what do you change? How do you change your discount rate? Do you change it based upon the long end or the short end? And is it a real asset that you want to use in terms of when there’s limited amount? Like ultimately, I actually think that inflated, equities do better than people are expecting, because there’s not enough, there’s just not enough things to buy. And then let’s just face it, there’s a lot of equities, a lot of pricing power. But it could be a huge change in terms of what does well, but if you really think about right now, its growth has done really well. And growth is actually a longest duration asset, because there’s no, all the growth is –

Mike:00:59:00No yield.

Rodrigo:00:59:01There’s no cash flow.

Kevin:00:59:01And yeah, there’s no yield. And so there’s the ultimate kind of beneficiary of the long end going down in terms of yield. So I think as we go into this new environment, we could see a situation where there’s a huge shift, and all the, you know, kind of economy stocks do better. And then if you top it all off, in that, I suspect we’re going to see a political shift from Wall Street continually winning, to more and more mainstream winning over Wall Street. So I think that there’s the potential for some huge dramatic shifts and real money to be made within the stock market. I’m hopeful that it just causes a kind of a rotation and that you get new winners and new, you know, the FANGs go down and so some other ones go up. But, you know, –

Rodrigo:00:59:49Yeah.

Richard:00:59:50But for the market cap rating –

Adam:00:59:50But FANGs are 80% of the stock market. So –

Kevin:00:59:53Yeah, again, listen, I am concerned about that. If you had to make me guess, I guess if we got too violent of a shift, it would actually cause the stock market to go down, so see, I can completely see a situation where the FANGs get crushed for 30% and the stock market ends up being 15 down, 15 or 10 or something. And one of the things like, you guys are a quant shop and you guys understand this better than almost anyone else. But think back to like, what was it? ’07, when we had the quant crash or whatever it was, and people outside the market don’t understand how violent that was, and what was happening in terms of within, you know, rotation within markets. And I suspect that the possibility of a quant crash again, is way higher than people believe.

Adam:01:00:39We don’t need to be that dramatic either. Like you just need to, it sort of could be like ‘98 to 2000 period where value stocks did well, while well tech, or sorry, value stocks kind of flat-lined while tech continued to run and then tech crashed in 2000, 2003. And then value stocks kind of –

Kevin:01:00:58Right.

Adam:01:00:58Continued to run despite the sort of index bear market, right? That sort of rotation –

Kevin:01:01:05Yeah, so here I have a question for you, in 2000 it was Julian, Julian at Tiger. There was the kind of the tapping out, right?

Rodrigo:01:01:14Yeah.

Kevin:01:01:15The person who kind of tapped out. I saw recently there was some $10 billion value.

Adam:01:01:18That’s right, I forget his name but I’ve seen it, a huge value funds wound down.

Kevin:  01:01:23Are we there?

Mike:01:01:24Yeah.

Kevin:01:01:25Are we there?

Mike:01:01:25So I do want to be conscious of time.

Kevin:01:01:27Okay.

Mike:01:01:27It is 4:01 for you Kevin.

Kevin:01:01:29Yeah, I actually should get going.

Mike:01:01:31Yeah, you got to get going. So –

Kevin:01:01:32I’m sorry I chatted so much, I didn’t listen to what you guys, I’d let, you know what? It’s been a pleasure being on with you guys. I’d love to hear more about what you guys think about inflation, and how you guys are actually adapting to it. Because I know that this is something that in terms of the whole risk parity model that you guys are, I’ve been focused on a lot, right?

Mike:01:01:49Yeah.

Rodrigo:01:01:49I’ve been hoping, I’m actually hoping that you guys can stick around. But I have a few questions for the rest of you guys on that.

Mike:01:01:54Sure, we can hang on.

Kevin:01:01:55Okay.

Mike:01:01:55But, you know, Kevin’s got to go. We will do this again. It’s always great to chat.

Adam:01:02:00Thank you Kevin, sorry I joined late.

Kevin:01:02:02No problem. Pleasure meeting you all, thank you for taking the time.

Richard:01:02:05Will do this again.

Rodrigo:01:02:05Thanks Kevin, you are awesome.

Kevin:01:02:06Bye. Bye.

Richard:01:02:06Thanks.

Protecting for Inflation

Rodrigo:01:02:07So I have a question for you guys, right? That I’ve been mulling over, when you think about this idea of protecting for inflation, even if we say that you asked for the highest convexity trade and five year break-evens, like what does that actually mean? Does it mean that if you have 100 cents on the dollar, and there is a high inflation scenario that’s going to take your earnings or your real, you know, purchasing power down by half, that by buying something like that, you are going to simply offset it so that you are not any better or any worse, you’re just simply surviving? Or –

Adam:01:02:42You can buy inflation swaps. You can buy, if you buy inflation swaps, you’d like put a little bit of nominal down and you can get massive levered exposure to the inflation accretion, right, relative to nominal. So it’s just really like –

Rodrigo:01:02:59 That’s the way I want to go.

Adam:01:02:59If that’s the way you want to go.

Rodrigo:01:03:00Yeah.

Adam:01:03:01Depending on how much, yeah.

Rodrigo:01:03:02So let’s go back, sorry, I just –

Mike:01:03:06Keep going. Keep going.

Rodrigo:01:03:08So let’s go back to the concept of, you know, something like risk parity, which is not trying to predict the future, right? And let’s say that the inflation assets that we’re looking at have an allocation of 25%. Because, you know, there’s an anomaly with risk parity. What happens to the real value of that portfolio during an inflationary scenario, right? I mean, necessarily you’re just kind of losing less with only 25% exposure, or let’s say, a third real exposure.

Adam:01:03:44First of all, like, what’s your consumption basket, so losing less, right? If your consumption basket is not, doesn’t contain a lot of the things that are inflating at the highest rates, then you’re not actually losing very much purchasing power, right? If your consumption basket is filled with things that are, like many peoples’ are or have been over the last 30 years, if your consumption basket is, I got to pay for my kids education, I got to buy a new home, I got to buy for, pay for health care, the inflation rates of these services has gone up at a much higher rate than CPI, right?

Richard:01:04:19Yeah.

Adam:01:04:20Or the GDP deflator. Go ahead, Mike. Sorry.

Mike:01:04:23So this was the conversation you and I had yesterday, right? There’s two dynamics at play here. There’s the asset price and it can have a collapse, or it can increase. It’s your purchasing bucket.

                                                                          And the deflation that can occur or that by, that, I don’t mean deflation in the social sense, I mean, the purchasing power loss that your currency that you’re holding can also accrue. So for each individual, these things are slightly different. And the losses can happen in an innumerable number of ways. You can have asset prices collapse. You can have inflation eat in as asset prices are maintained. And all of the circumstances in between those two extremes, and so this, you, and this is what I was kind of wrestling with too Adam. Is there a clear way to delineate that? I’m not sure that there is. It is in your mind –

Adam:01:05:16I agree, I don’t think there is, I mean, there is a charge that they put in the, in their consumption basket, they put in the GDP deflator, how they define CPI. So this is whole ambiguity, the government is able to actually control the rate that they adjust the inflation protected bonds by adjusting the way that they calculate the rate of inflation of the consumption basket. They could change the constituents. They could change the hedonic adjustments. They could change the seasonality adjustments. There is all kinds of things that they can do. Notwithstanding that, it depends on the type of inflation, right? If you’ve got inflation, like we saw in the 1970s, which was largely just major supply shocks in commodities, due to political upheaval, or, you know, other sort of external dynamics, then you’re going to see a major shoot higher in the commodities, but you didn’t have huge wage inflation in the 1970s, right? Like it was very commodity driven. If you have wage inflation as a major driver, then what you want is something that is going to do well with CPI driven inflation, that’s where you want to have sort of TIPS in the basket, right? But if you have a global currency devaluation, then that is where you want to have gold, right? So it’s, or maybe sort of real estate or some other assets. The point being, we don’t really know how inflation is going to manifest. And we don’t know how it’s going to affect you as an individual and your consumption basket, which just means you want to diversify your inflation hedges, right?

Rodrigo:01:06:45Right. And that could include currency.

Adam:01:06:46You want to own a home. You want to own some gold. You want to own some TIPS. You want to some diversified commodities, but you want to diversify to the greatest extent possible, which is kind of just thematically consistent with how we think about the problem in general.

Rodrigo:01:06:57And if a country that you’re in wins the currency war, meaning they devalue their currency more than anybody else, what we actually want is, investors own the other currencies, right?

Adam:01:07:05Sure.

Rodrigo:01:07:05Again, like there’s different things that you need to diversify in order to mitigate the possible many inflation scenarios that’s talking, that we talked about.

Mike:01:07:12Well, I think the interesting thing here is, what is the likely inflation outcome of an MMT type policy, which is targeted at making sure capacity utilization in the economy is at the highest level, making sure that employment is at the highest level, and so that there could be a tendency in that construct that it is a wage type inflation, that that is the push. And so that would be the thing to think about it. I mean, it’s a speculation, I agree with you, Adam, that the first place to start is, well, let’s not, let’s not be too sure about which way it’s going to manifest, let’s just take a really –

Adam:01:07:53I think Brian in the comments makes a really good point. It’s never, you don’t get rewarded for buying TIPS for the inflation that everybody expects.

Mike:01:08:00Correct.

Adam:01:08:01You get rewarded for the inflation that nobody expects.

Mike:01:08:04Unexpected.

Adam:01:08:05For unexpected inflation.

Mike:01:08:05Yeah.

Richard:01:08:07And you have to account for the government also potentially, as you mentioned earlier, changing the basket of how they calculate CPI. So putting all that aside, if the market catches on to potentially not receiving however the market, however the government is measuring inflation through CPI as being the true measure of inflation. And then perhaps real rates are using another basket or at least there’s this other way of measuring inflation that is much higher than the official measured CPI, then you might make a strong case for gold since it is very positively correlated to real rates. That real rate even though it’s not expressed by a CPI could still provide gold with that highest convexity trade that you were looking for.

Rodrigo:01:08:52Well, yeah, like that’s what’s, what does Mike Green always say? Not Mike Green, it was, Diego Perilla, right? What you never need to forget is that the government can always change the rules, and they will, right? So if they have inflation

Richard:01:09:07It’s actually a good scenario.

Rodrigo:01:09:07And they don’t like, they have to pay out based on that inflation, well, they can simply change the characterization of the basket.

Adam:01:09:18I want to shift.

Rodrigo:01:09:19That’s what scares me.

Adam:01:09:19Maybe we have, maybe we haven’t finished with the inflation part of the discussion. So we can, if we haven’t, then I’m happy to sort of indulge further discussion in that dimension. But on the MMT front, what occurred to me is, everybody focuses on inflation, is that the only thing that we need to be concerned about, is that the only currency?

Rodrigo:01:09:37No.

Richard:01:09:38Currencies, I think the other side of it is –

Adam:01:09:39Even currencies are really just like the relative purchasing power. It’s like relative levels of inflation, right?

Rodrigo:01:09:46What, are you talking, are you asking about, concerned about in terms of market dynamics or social unrest? Because I think there’s a lot to worry about.

Adam:01:09:53It’s more social unrest to me. It’s more –

Rodrigo:01:09:55Yeah, a 100%.

Adam:01:09:56Every conversation I’ve heard from Kelton. I haven’t heard anything from mostly, I’ve read some essays and some distillations, but everything I read is a focus on how can we increase aggregate wealth, not like median wealth, or median prosperity or something like this, but aggregate wealth, and to the maximum extent without triggering a change in inflation expectations. Because there’s this feedback loop on inflation expectations, once people perceive that they need to be worried about inflation, they change your behavior and it creates inflation. So this is the only thing that dominates the conversation, but these are not the only thing that matters to a cohesive, productive, fruitful social fabric society of people who are happy and who buy into the social experiment.

Rodrigo:01:10:49Right.

Adam:01:10:49And then –

Richard:01:10:52What we’re seeing in terms of the social tensions and because of wealth inequality, and what that has done to the fabric of society, of a lot of tension. I mean, obviously, everybody looks at the US, and how polarized they are, and especially now that you’re coming up into the presidential election, but it’s happening all over the place. I mean, Canada, I think has a more muted version of it, but it’s happening in Brazil, it’s happening in Europe, it’s happening all over the place. So I sympathize with that.

Rodrigo:01:11:19Like, look, you have, much like Kevin said, right? MMT doesn’t need to be fiscal spending. It could be cutting taxes. And it really does depend on –

Adam:01:11:26That exacerbates the challenge.

Rodrigo:01:11:28I know. I know. But that’s my point. My point is that depends on the policy, on the political party that takes control of this new MMT, right? If you have the Republicans who don’t think that the government can spend in as well as a capitalist system, right? So they’re going to do it as much as possible to be fiscally frugal and thoughtful. And if they’re going to do anything, they’re going to do it at that side –

Richard:01:11:47That’s not the current Republican Party.

Rodrigo:01:11:49Hold up.

Richard:01:11:51You’re thinking –

Rodrigo:01:11:52It is, no, no. I’m thinking, I’m thinking about the last few weeks, the Republicans not wanting to give as much money for the, for the COVID spend, as they did, as the Democrats do. So my view is that if you get the Democrats on board, the type of spending that they’re going to do is going to be more about minimizing that wealth gap.

Adam:01:12:14It doesn’t matter.

Rodrigo:01:12:15The direct money, of course –

Adam:01:12:16Kevin actually made the perfect, most distilled point imaginable about MMT. Debits on the federal balance sheet are credits on the public balance sheet, and the credits accrue to those who don’t need to spend the excess. So if you’re extremely rich, and you get, your proportion is higher than the rest because you own a company and all spending is a flow through company income statements, right? But you are already very wealthy and your marginal propensity to spend is small –

Richard:01:12:54Much lower.

Adam:01:12:56And the Cholesky equation makes it abundantly clear that the vast majority and at the limit, all of that excess credit accrues to those who don’t need to spend.

Rodrigo:01:13:10Which is why you need to have a thoughtful policy to redistribute that wealth. And generally –

Adam:01:13:16But that’s never part of the conversation. I hear the topic of discussion about MMT –

Rodrigo:01:13:19But of course it is, the deal and UBI, all of that was based on trying to take money away from that 1%.

Adam:01:13:26It doesn’t. It continues to drive higher the Gini coefficient of the wealth distribution.

Richard:01:13:38We need to see more progressive taxation along side –

Adam:01:13:43Distribution alone will not change the wealth distribution because every dollar spent out of that thousand dollars or 10,000 or hundred thousand dollars a month, whenever they decide that they want to put a pin in it, all of that flows to the corporate balance sheet and it all flows to profit margins. Sorry, is that my house?

Rodrigo:01:14:03That’s your house. The dog doesn’t like your argument.

Adam:01:14:05You cannot

Mike:01:14:06The happy hour –

Adam:01:14:08You cannot reduce the wealth gap through MMT. It can only exacerbate it, you can only reduce the wealth gap to redistribution and –

Mike:01:14:17Yeah, you want taxes.

Adam:01:14:18And the question is, right now everybody believes that they need to pay taxes because there’s accountability to fiscal prudence. Once nobody believes there’s accountability to fiscal prudence, why is anybody motivated to pay taxes? Because everybody wants to lower everybody else’s rate of inflation?

Rodrigo:01:14:34Okay, so what happened in the new deal back in the ‘30s? Well, how did that go about? And how did that help minimize that?

Adam:01:14:42Well, in the 30s, people had already lost massive amounts of wealth, including the rich, right? Keep in mind, the stock market declined 90% between 1929 and 1932, the wealthy took it on the chin as well. And then Roosevelt stepped in. So everybody, they’d already massively flattened the wealth curve. By 1932, 1933, the wealth curve was as flat as it has ever been. And then they began massive MMT type policies. So they created a whole new class of rich through the end of the war.

Richard:01:15:17Let me talk about something –

Adam:01:15:18But you started on a level playing field, now you’re starting from an already, a playing field that’s already where it was in 1929.

Mike:01:15:23The shorts, for the robber barons, were right in that era. So they were just before that period. So you’re saying after ‘29, the robber barons, their wealth was shrunk to the extent that it flattened the wealth curve, I’m not aware of that. That’s –

Adam:01:15:38Correct. Think about it, where all their wealth was in capital assets, capital assets deflated to the tune of 90%.

Mike:01:15:44It wasn’t even, it wasn’t even the stock markets, right? The stock market was a very small portion of the overall economy.

Adam:01:15:47Exactly, real estate, corporate assets –

Mike:01:15:49So it was actually private companies or the oil being pumped by Standard Oil, and Carnegie and his steel and etc, etc, all of these things, massive unemployment, massive capacity under-utilization. So all of those things were there, so, you know, at that point, you have to, I mean, you could, you could, we certainly have the wealth gap today, obviously, at an extreme not seen since the robber baron era. So, yeah, I guess how do we punish the rich?

Adam:01:16:58It’s very easy to implement aggressive MMT when we, when the rich have already taken their share of losses.

Mike:01:16:24Yeah.

Adam:01:16:25Right now the rich have gotten richer while everybody’s gotten poor. And now –

Rodrigo:01:16:29So your thesis is because every dollar spent from, you know, you give a $1,000 a month to everybody on the planet and they actually use it productively, right? You grab it, and you could become an entrepreneur, a lot of people may or may not, maybe just spend, because that spend goes to the corporate balance sheet, you’re saying the rich are going to continue to get richer, and that disparity is going to get bigger and bigger. That’s assuming that the thousand dollars you give them is, like we talked, we talked about productive debt, productive capital and unproductive capital, is every single person that receives that thousand dollars a month, going to be unproductive and just buy more Amazon packages?

Adam:01:17:01What do you mean unproductive? The vast majority people that are going to receive that money are going to buy food, gasoline for their cars

Richard:01:17:06Their propensity to spend is much higher.

Rodrigo:01:17:09But what percentage of the population is going to use it to start a business, right? This is a big push on the UBI. A big conversation about this, if you listen to Andrew Yang, and he’s got data to back it up, is that people will use it to make, to build their own companies, to build their own businesses, create more productive capital. I mean, this is how you reduce the wealth gap is that you give capital and assets –

Adam:01:17:31No, that’s not how you reduce the wealth gap. It creates more business. It creates a more dynamic economy. It creates more services and goods, but it exacerbates the wealth gap. The only way to close the wealth gap is through redistribution, or through a massive collapse in asset prices, period, full stop. Those are the only two ways. You cannot do it by growing the economy. Growing the economy –

Mike:01:17:59Wealth distribution is it tax thing or we can accomplish that by taxing the very rich or you don’t think we can? I mean –

Adam:01:18:05No, no.  I think you can and I think that we will. But you can’t do it by income because income is such a ludicrously small fraction of wealth.

Mike:01:18:12Yeah.

Adam:01:18:13That it’s the income taxes –

Richard:01:18:15And the effect of compounding, but I want to tie this back to sort of to what we, it’s what Kevin was saying. It’s not what we think should happen. It’s what we expect is going to happen. So Rodrigo, you were saying that the Senate in the last few weeks, the Republicans were fighting the package –

Rodrigo:                                                        No, the size of the package.

Richard:01:18:30That has to do with brinksmanship coming into an election. Trump has, its populism on the right or populism on the left. The party of Reagan is no more. Perhaps the Tea Party is going to reignite that, those flames if he loses. If Trump wins, it’s four more years. The reason why the Republicans, and this is my hypothesis, they didn’t want to pass this is because they expect Trump to lose. And so they didn’t want to hand the Democrats with this –

Rodrigo:01:19:01Massive win, I get.

Richard:01:19:01free of cash flow that is –

Rodrigo:01:19:03Look, I’m not saying that the Republicans are not going to also spend

Richard:01:19:08It’s populism on both sides of the aisle.

Rodrigo:01:19:10It may be. It may be. But there’s degrees of it, right? As you would expect, as you would expect. You will expect –

Adam:01:19:16I don’t think so.

Richard:01:19:18I think there’s different ways to do it –

Adam:01:19:18The same amount of money might go one direction or the other.

Richard:01:19:21Yeah, exactly.

Rodrigo:01:19:21Okay. So what happened? Well, hold on a second. You guys are talking about taxes. So the Democrats are going to reduce taxes.

Adam:01:19:25No, I’m not.

Richard:01:19:27This about fiscal spending.

Adam:01:19:28Yeah.

Richard:01:19:29In aggregate, whether you do it, whether you –

Rodrigo:01:19:31But there’s ways to spend fiscally and there’s, are you telling me that the Democrats and the Republicans are going to end up spending fiscally in the exact same way? That they are going to have the exact same impact?

Richard:01:19:39Trump is a populist as –

Adam:01:19:41The same dollar amounts, yes.

Richard:01:19:42Yes, I would expect –

Rodrigo:01:19:43Okay, hold up.

Richard:01:19:44It would happen. He might not have the Congress on his side –

Rodrigo:01:19:46So I disagree. I disagree. I think that the Republicans as a whole will spend less, and try to get stimulus in the economy by cutting taxes, and the Democrats will try to redistribute the pie by spending more money and taxing the economy trying to redistribute the wealth.

Adam:01:20:01I like the taxing metaphor.

Rodrigo:01:20:03Yeah.

Adam:01:20:03I like the metaphor of the Republicans as a whole, spelled h-o-l-e , and the Democrats as a whole, because I agree, both of them are a hole in the earth that they just pour money into and –

Richard:01:20:16Right. Yeah.

Adam:01:20:17Just, and as Kevin described so perfectly, it is a debit in the government, that is instant credit in the bank accounts of the private sector, and those with the greatest current credits have a vastly greater share of the –

Rodrigo:01:20:36It depends on –

Adam:1:20:37Of the new credits.

Rodrigo:01:20:373How –

Richard:01:20:39And to add that –

Rodrigo:01:20:39It depends on how it’s distributed.

Adam:01:20:40It’s not.

Rodrigo:01:20:42Of course, it does.

Adam:01:20:42It doesn’t.

Richard:01:20:40We’ve stepped way outside of our expertise and we’ve become a political podcast now in the last… –

Rodrigo:01:20:48Finally interesting, guys, we’re finally interesting.

Adam:01:20:53None of us has taken a political position. I don’t think anybody has been like anti Trump or anti Biden.

Richard:01:20:56Not at all. No.

Adam:01:20:57It’s just a discussion of policy and social policy, but completely –

Richard:01:21:06Apolitical.

Adam:01:21:07Apolitical.

Richard:01:21:07Yeah.

Mike:01:21:09It’s interesting, though, that, as Kevin pointed out too, the idea of MMT as applied by one party versus another is a different set of policies.

Rodrigo:01:21:20What do you think is going to, are we, we do we think the Republicans, they must seize control the Senate or Congress? Do you think they may not use as a political tool, not approving the debt ceiling to be brought up like they have to approve every single year? Do you think they may not use that, and if they do use that that’s going to create less fiscal spending in a way that the Democrats may not? It’s like, this is, there’s going to be different things at play based on these two policies, these two governments, and who’s in. I mean, and I, you’re going to see that the Democrats are going to try to extend, to redistribute the pie better than the Republicans.

Adam:01:21:55I’m reminded of our friend, Doug, who tells the story about driving to the McDonald’s drive thru. And he ordered some food and he gets at the drive thru and realizes all he’s got is some change. And he reaches out his hand to the drive thru and he just dumps a bunch of change into the drive thru lady’s hand. And, you know, to me, it’s like, do I dump change out of my left hand or do I dump change out of my right hand? But it’s, it ends up being exactly the same change, going the exact, going to the exactly the same place. And this, this whole thing is just like some strange theatre that, in the end, ends up in exactly the same place. You know, it’s weird because I, as a social progressive, I absolutely want spending on things like, you know, children from mothers with HIV and children with mothers with hepatitis, and all these programs that were cut under the current administration, it just seems barbaric, and I want funding for these and if it requires deficit spending, fine. But what I want to avoid is a policy that doesn’t consider other social dynamics that are important other than just inflation, because it feels like the entire MMT conversation is about, how much money can we fire hose into the system before we get inflation? And there are other social dynamics that will play out –

Rodrigo:01:23:27And your thesis is that this will not alleviate social issues, this will exacerbate it, that’s your thesis?

Adam:01:23:34It will alleviate some and exacerbate others, I think.

Rodrigo:01:23:40I agree to disagree.

Mike:01:23:41Well, this is the challenge, right? It can, you, so I’ll snap my fingers and make you the boss of how it gets spent. And the boss of when you stop spending in anticipation –

Adam:01:23:52Keep in my mind that after the war, they instituted a profit caps to companies.

Mike:01:23:56Yeah.

Adam:01:23:57Right? So, a company was not allowed to earn a profit margin larger than a certain amount and any excess was taxed. And so that was a way to ensure that the kings of industry were not profiteering on the backs of the war effort, right? And so we’re fighting a different type of battle. It’s a different type of war, but it is a war against poverty, against the pandemic, against, you know –

Mike:01:24:24 Have we, have we done to some of that with some of the spending done to find a COVID vaccine? So the government’s participation in putting money towards that, and subsequently sort of capping the profit margin on that, is that sort of happened already a little bit?

Adam:01:24:38I don’t know It would surprise me if it did.

Mike:01:24:40I mean, my recollection is very light here. But I do recall, into sort of the US government sort of giving these companies a fair bit of money to –

Adam:01:24:51It called it ‘equity capital’.

Mike:01:24:53Correct.

Adam:01:24:53Yeah.

Mike:01:24:54So whereas –

Adam:01:24:35The country shares –

Mike:01:24:56Yeah, and the companies actually have been put in units where they have to actually work together, because it is a shared discovery, and it has shared implications across all of society. So I’m really light on that, I just recall something about that, and it could have gone by the wayside. But it would make sense from that perspective for a vaccine. So impactful is a COVID vaccine to take that approach. It’s absolutely, you know, there are no –

Adam:01:25:22It’s thematically on side, agreed.

Rodrigo:01:25:26So Adam, just, what is, you know, you have the world best spot now, you get to do whatever you want in order to minimize the wealth gap, what happens? What policies do you create?

Adam:01:25:38I would obviously introduce much more, I think plain vanilla, what’s the right word for it? I mean, so many of the problems with the tax code –

Rodrigo:01:25:53Loopholes.

Adam:01:25:53Are that many people can avoid, there’s so many ways to wiggle out. So one of the things I would do is I would make it impossible to for people to wiggle out of paying tax –

Richard:01:26:02Enforceable and progressive, is that what –

Adam:01:26:04A 100%. Yes, much more progressive, much more enforceable. And, you know, I don’t know if it’s constructive for our business for me to go through all of the policy choices that I would make.

Mike:01:26:20Please, please.

Adam:01:26:21Yeah.

Rodrigo:01:26:24So you would implement this today in a period where we are at the brink of deflation and negative growth shocks, where, you know, people are counting their pennies across the board –

Adam:01:26:39So tell me what’s so bad about deflation for the vast majority of people?

Rodrigo:01:26:44There are no jobs, unemployment, not being able to eat like –

Adam:01:26:50Well, hold on

Rodrigo:01:26:50The Great Depression.

Adam:01:26:50The cost of food drops, the cost of education –

Rodrigo:01:26:54Nobody has money.

Adam:01:26:54The cost of gasoline drops, the cost of your mortgage drops, the cost of your, like, generally –

Rodrigo:01:26:59The income that comes in from your tax burden goes down. I mean, these are bad –

Adam:01:27:04What tax burden? Do we really care about taxes anymore? I thought MMT was about we don’t really care about taxes.

Mike:01:27:10Well, you raise taxes to control inflation, which is another whole strange thing that I’m not. Like, again, I got, it is when –

Adam:01:27:18I actually buy the mechanics of it. A 100%, a 100% agree in the mechanics, if everybody understood those mechanics, our entire social fabric would evaporate.

Mike:01:27:32That’s a good statement.

Rodrigo:01:27:34I love that. You base that on that one white paper where there’s only one winner. I mean, there’s other elements to all of  this.

Adam:01:27:39That’s not true. We can totally talk about that, but this has nothing to do with it.

Mike:01:27:42And I think that’s what he’s saying.

Adam:01:27:41Yeah.

Mike:01:27:42Yeah, I admit that.

Rodrigo:01:27:43So, sorry. I might have missed it. Are you talking, are we talking about whatever we do in MMT, and it ends up in, being one winner and that white paper you constantly –

Adam:01:27:50No, no, no, I mean that, under MMT, taxes are only owed to control inflation, and therefore, if that’s true, it’s not to balance a budget, right? Keep in mind the, people pay taxes because they believe that they are contributing to a social good. They’re paying for health care. They’re paying for, you know, the fact that they don’t need to walk down the street and see homeless people on the street. They pay for the kids to go to school or other people’s kids to go to school or whatever. There’s some sense of social participation in the tax narrative now. Under MMT, we can print as much money as we want, but the relative deficits are immaterial.  So I’m not actually paying for my kids school or my neighbor’s kids school, or for, to support the minimum income level of elderly parents or for healthcare for poor children or for, to support children’s lunches or whatever, rather, I am paying to control some ephemeral inflation rate that the government’s going to tell me that’s going to be hotly contested, and that the government themselves can manipulate the definition and measurement of. Like, that’s a totally different social commitment than the current commitment for taxes. So why are we paying taxes? And how are we going to persuade people that paying taxes is important or virtuous?

Rodrigo:01:29:20Well, look, and there’s a difference between federal taxes and state taxes, right? Because you can’t do it at a state level, you can’t print money, you actually have to balance –

Adam:01:29:28We were, we were talking about MMT which is clearly at a federal level, right?

Rodrigo:01:29:30Yeah.

Richard:01:29:32Okay, you might think about –

Rodrigo:01:29:34All those policies you mentioned have a lot to do with state based welfare and all

Richard:01:29:39At municipal, right? It’s what Taleb says, on a family, on my family nucleus, I’m communist, on my neighbourhood, I’m a socialist and as you scale up you become a libertarian on the federal level. So absolutely, there’s no doubt that you need decentralize –

Adam:01:29:53And there’s no facility for the feds to come in and bail out, for example –

Rodrigo:01:29:55I guess, look, it’s all –

Adam:01:29:56All pensions or statements –

Rodrigo:01:29:57It’s all human, it’s all storytelling, right?

Adam:01:29:57Where are the major liabilities on state books?

Mike:01:30:01Pensions.

Richard:01:30:04Gents, this is a rabbit hole that we could definitely keep going, no doubt, yeah, I do have a hard stop because I have a plane to catch.

Rodrigo:01:30:12I also have to go.

Mike:01:30:12Alright, then great.

Rodrigo:01:30:15Alright, man. Enjoy COVID flying.

Richard:01:30:16Thank you.

Adam:01:30:17Good luck over there.

Richard:01:30:20Yeah.

Mike:01:30:20Everyone wish, oh God, I don’t know, Richard is flying to the Ma –

Richard:01:30:26It’s going to be fine. It’s got to be fine. I’ve got some Armagnac and my –

Rodrigo:01:30:30And make sure you got your Armagnac and nitric oxide and breathe that in?

Mike:01:30:34Hey, guys, who do we have next week by the way? We have .Jardine on?

Richard:01:30:38That’s right.

Mike:01:30:38Is it Kevin? So this is going to be fun next week, I think too.

Rodrigo:01:30:41Yeah.

Mike:01:30:42We’re going to be talking about optimal performance –

Richard:01:30:43Let’s not give it away. Let’s not give it away.

Mike:01:30:45Why? I’m going to give you a little taste, like a little taste, a chiropractor who deals with a lot of

Richard:01:30:53Marvel’s Stinger, this is the Marvel Stinger for those of us that have stayed up until the very end, after all, the political ranting.

Rodrigo:01:30:59He is a very successful entrepreneur that is also a coach and physical therapist and the chiropractor’s coaching. Bianca, I can’t remember her last name.

Richard:01:31:09Andreescu?

Adam:01:31:11Andreescu.

Mike:01:31:11Yeah.

Richard:01:31:12Yeah. I’m going to miss that one. He is a great guy.

Rodrigo:01:31:15He’s been both my physical therapist and life coach and business coach. He’s got a lot of interesting life experience. I think everybody would agree.

Richard:01:31:23Yeah.

Mike:01:31:24Yep. So also, I will give a shameless plug. I know it’s at the end people are tailing off but just remember to subscribe and like and share and get the little notification bell. We did this one an hour earlier. So I know we probably caught a few people just off guard a little bit. But, you know, we have to, we want great guests. Kevin was amazing, and so we do have to vary the show a little bit and its time. But, you know, the more popular you make it, the better the guests we can have, and the more conversations that you can hear, you know, these crazy four guys doing –

Richard:01:31:59And if you don’t want to go, if you don’t want to go the full hour or hour and a half, we’ve also recently launched the Mini – Riffs channel, which allows us for some short snippets, and soon to be rolling out some original content for that channel as well, so stick around.

Mike:01:32:16Yeah, bite sized wisdom.

Richard:01:32:17Yeah, that’s right.

Mike:01:32:18Alright, gentlemen –

Richard:01:32:18Alright guys, this is fun.

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